Commentary, information, and intelligent discourse about the Irish economy

Ireland in the European Court again, now over gas

In December, I blogged about the gas interconnector, the Shannon LNG terminal, and the need for regulatory reform in the wholesale gas market.

Last week, the European Commission chipped in. It is taking Ireland to court over the lack of competition in the market for gas between Scotland and Northern Ireland, and between Ireland north and south. Intriguingly, the UK is sued as well, although most of this is Irish rules on UK soil.

John Fingleton gave a great presentation at last week’s conference on the Irish economy. Among other things, he argued that competition policy in Ireland exists by virtue of the European Union.

41 thoughts on “Ireland in the European Court again, now over gas”

Thanks, Richard. For what I suspect are unspoken but fairly obvious reasons for those who keep their eyes and ears open, your earlier post was a tad gnomic and cryptic. Over the last few years the CER, the NI Utility Regulator and the relevant arms of government on these islands have been putting effort in to developing Common Arrangements for Gas (CAG) that would parallel and be analagous to the all-island Single Electricity Market (SEM). For a variety of reasons progress has been slow, but one factor is the need to have harmonsed gas transmission tariff arrangements on the island.

The unpublished elements are much more fun. The CER indicated that a decision might be made by the end of this month. We’re getting close and there’s no hint of white smoke. The crux of the problem is that BGE needs the €50m a year it gets from the interconnectors (whether they’re fully used or not) to help finance its forays into renewable energy and the electricity market (and any other empire building it might have in mind). This €50m is ultimately being paid by consumers since most of the gas flows throughout the interconnectors.

The problem is that when Corrib comes on stream (and if or when Shannon LNG comes on stream) BGE’s interconnectors will be little used. The CER’s original idea was to impose some of the €50m revenue recovery on the Shell Consortium and Shannon LNG. Not surprisingly, these parties were less than impressed with this idea.

(The ‘powers-that-be’ would love to bury Shannon LNG – though publicly they are forced to welcome it through gritted teeth – because they might be able to come with this temporary fix to deal with the impact of Corrib gas, but Shannon LNG could put the kibosh on their fixing and fiddling capability.)

The likelihood is that they’ll try to secure some relatively minor contribution from the Shell Consortium and from Shannon LNG (should it come on stream) to disguise and distract attention from the extent to which final consumers will continue to be hosed. They won’t want to open the can of worms in a legal challenge. The extent to which consumers are being hosed to provide up-front financing of investment that should be provided or arranged by the majority shareholder – the state – could be revealed.

The EU’s intervention is not unexpected but is probably considered unhelpful. It is a perfect example of the clash of optical illusions. The first is the optical illusion of a competitive all-island market which the official players are straining to project. The second is the optical illusion of the EU Gas Target Model which the Commission and all EU energy regulators are seeking to project. They’ll probably be able to reconcile the differences in their illusions, but the only thing that is real is that consumers everywhere will continue to be hosed.

The EU energy policey of competition for natural utilities is a sick joke on us all , not only is it a sick joke but also a energy disaster zone.
When you have “competition” for such natural monopolies the surplus will be extracted and spent on consumption elsewhere – the capital is not recycled , its extracted over time.

Nation state control over these areas was far more effective during the post 1970s oil crisis era – the real investments back then contributed to the 1980s oil glut – these were then privatised and progressively ran down to express false profits in the 90s & 00s
The situation is almost identical to the banking fiasco and indeed is closely linked.

Off topic-ish. Can someone explain something to me, genuinely, I’d like an explanation, if one is available. Why is it that when we had no ‘competition’ in electricity market, when we only had the big bad ESB, stuffed/staffed with 3 times the current staff level, we had some of the cheapest electricity in europe. It seems to me that ‘Competition’ in the Irish elec. Market is at best disingenuous and at worst a total scam.. Though I may be wrong?

You pose an excellent question and it is not as off topicish as you might think. From the mid-90s (before the CER was established in 1999) until the early 2000s the ESB (and BGE) applied a price freeze. BGE did it largely on a ‘me-to’ basis, but the government intent was to squeeze revenues and profits to squeeze wage costs. And to a large extent it worked. The ESB was able to slim its workforce considerably and BGE, while not having as much fat, outsourced a lot of its activities and, for its size and range of activities became one of the most operationally efficient gas utiltities.

However, the effect of these price freezes was to boost demand – and the demand for investment in generation and networks. (There can be no doubt that some of the big IT players were attracted to Ireland by low electricity and gas prices in additional to all the other inducements.)

But the reduced cash flow (and the previous abandonment of the ESB’s double depreciation technique – a depreciation charge plus a charge to build up a sinking fund) starved the company of investment finance and a huge investment backlog built up.

The ’97-’02 government wasn’t going to invest directly, it didn’t want to take the flak from increasing prices and it had to implement the darned 1996 EU Electricity Directive which was the first step to constructing the EU’s optical illusion of a competitive electricity market.

Enter the CER. It would be ‘independent’ of government, regulate the industry and ‘keep the lights on’. The EU rules meant that the ESB’s monopoly in generation had to be reduced so it couldn’t build and operate the new egneration capacity so badly required. The CER had to sanction high prices to induce new generators to invest.

And there was a requirement for huge investment in the networks. The CER revalued the assets on a current cost basis which majicked up a value for assets that had already been depreciated. Consumers ended up paying the the full return on and the full return of all the assets (some depreciated, some partly depreciated and new assets). There was no doubt that prices needed to increase, but these two interventions by the CER drove prices probably 20% higher than they needed to be.

The bottom line is, whatever revenues the ESB wants the ESB gets. It’s hard to know if it was to cut a dash with the EU or for some other reason, but the ’02-’07 government decided to redcue the ESB’s share of generation on the isalnd to 40%. To get the ESB to consent to this they were allowed to expand their empire-building inside and outside Ireland and the CER was expected to ensure it had the cashflow to part finance this ventures.

As an example of this, at the end of 2010 when it was setting the allowed electricity network revenues for 2011-2015 and while the ESB was in the process of taking over the Northern Ireland electricity networks, the CER seemed to forget temporarily that its job was to ensure it extracted sufficient revenue from consumers to finance the ESB’s empire building. It proposed a rate of return (or Weighted Average Cost of Capital (WACC)) that the ESB deemed too low to generate the cash flow it required to finance its NI acquisition. All hell broke loose and the CER was forced to recant and award the WACC the ESB demanded.

As a former CEO of BGE once observed: “The ESB sets energy policy; the Department implements it.” It’s the CER’s job now.

Good question. I’ve looked into this a fair bit and was assured by some vested interests that the price was kept high in order to make it economical for new entrants to compete, but this narrative has been strenuously denied by CER, and they blame the rising cost of inputs -specifically gas. We are hugely dependent on imported gas especially from the UK.

This is obviously independently verifiable but I can never help thinking that the classification of the ESB as a “commercial semi-state” for benchmarking purposes led to a lose-lose scenario for the consumer and the state.

That left us both without a shareholder demanding lower costs and a bigger profit (which would have given the exchequer a bigger dividend) OR a government shareholder insisting on lower prices that would benefit the consumer and industry. Instead the company was run for the benefit of its workers and not either its shareholder or the consumer.

Padraig McManus is only 60. We’re going to be paying that 200k pension for a long time.

Yes, gas prices move up and down but the basic factor that keeps Irish prices relative to other EU prices is the hidden ESB and BGE financing tax to compensate for the state’s failure to finance investment directly or to arrange efficient financing.

Restructuring the ESB and BGE and privatising them would release significant proceeds that government could use to pay down debt and to finance new productive investments, would massively increase the efficiency of investment financing in these businesses and would reduce prices to final consumers (which would boost real disposable incomes and economic activity).

But we couldn’t sell the ‘family silver’ could we?

And it’s disappointing to see you swallowing the usual media line about the ESB staff. Why is it that labour is seen as the only factor of production? Why this weird ‘labour theory of costs’? Why do workers in the public or semi-state sectors need the stick, but those in the provate sector need carrots? One of the front men for the ESB Group of Unions, Brendan Ogle, has admitted they get ‘gravy’, but even if this gravy were removed it would have a negligible impact on final prices.

This a conspiracy between successive goverments, their officials, the CER, the ESB, BGE (with the tacit consent of other industry participants and quangos) to hose consumers. The workers and their unions benefit as well, but they are not driving it. And the ESB management are adept at using the Group of Unions to keep governments and the CER in line.

@Paul
The last time I checked sovergin goverments produced money , not payed it off – although I concede I could be behind the times.

Why don’t yee guys accept the privatisation of natural monopolies to pay down goverment money is the greatest scam of all time ?

Do you honestly think private companies would sink money into long term multi decade investments such as Moneypoint ?
The EDF Nuclear renaissance in the UK is coming along nicely don’t you think ?
How many years is it now ?
Me thinks it is 4 years or so (open to correction)
How many Dreadnoughts did nation states build between 1914 & 1918 again ?
They were the most complex large engineering feats of their time but somehow there was no problem making the stuff.

Well, I began by acknowledging that gas was a factor, so labour not the “only” factor of production.

Other points:

Who says Private Sector workers only get the carrot? It entirely depends on sector and even individual company (culture, profitability) etc. I’ve worked in some companies where profit-sharing/share options are an incentive and others where one is reminded that being employed at all is a privilege.

You say there is a conspiracy. I agree! And the driving force was the government/management/union troika. Didn’t I say that? And btw, whenever I wrote about this, it wasn’t just a question of lazy FnFers buying industrial peace + votes, but the Greens were remarkably laissez faire about it too, content to rattle on about stupid expensive wind power.

I agree with Dork.

– the Irish market is too small for genuine competition in energy generation and distribution – the barriers to entry are just too great.
– we should have a state ESB BUT BUT BUT it has to be managed BY the state FOR the state and if that means Ministers showing up at board meetings demanding lower prices for consumers/industry then great. We all benefit.

As it is, we lose. You have a management under no pressure from any source, either shareholder, customer or competitor.

On the matter of gas prices and specifically bulk tank prices for home heating etc – there is no doubt that we live in a country where two players in the market have been allowed to completely dominate the market with massive price distortions to our neighbours in NI.

Take for instance the following pricing discrepency between RoI and NI in relation to domestic bulk gas delivery:

And I’m also aware that larger industrial users in NI and paying €0.35c per litre.

And the most annoying thing is that the SAME company is supplying both sides of the border and making vast profits in the RoI. Competition me arse.

Perhaps its too much to ask the CER or Mr Rabbitte to look into this obvious consumer screwing in the RoI or would I be better off asking Prime Times Investigates ?

The sooner the Shannon LNG line comes on board the better (if at all) – European gas prices will collapse to US equivalents as shale gas hits the market – watch this space – very cheap gas is coming to a town near you.

Just reading now your narrative on the CER- I’ll have to read it a few times to fully get my head around it, but it seems to back up the suspicion that I had that it was interventions by the CER which made prices higher not lower, and that the effort to introduce competition became an end in its own right, rather than a means to an end – cheaper energy

@YoB

How much of the price difference is attributable to taxes rather than the product?

You’re assuming Euopean and US gas prices and product are fungible – they are anything but.

The US has been a net importer of LNG for the best part of 40 years – the very recent shale gas glut is I believe a significant game changer in terms of the commodity on a world wide basis (and partly the reason why the US economy has stabalised over the past 9 months or so) because the belief is (in the US at any rate) that shale gas will be the next really big thing as new nuclear plants, windfarms, tidal projects etc in the US are being cancelled or deferred at a very impressive rate.

There really is something in them there hills and its shale gas.

To see a nuclear plant project being deferred is a really big deal – just think of the planning involved etc and yet many of them have gone this way in the US over the past year.

US Natural Gas prices are lower today than they were over a decade ago and yet European gas prices continue to track Crude Oil prices – this is very odd and an significant price arbitrage is in the offing – if the damn thing could only be shipped in enough quantity to have a market impact on this side of the Atlantic.

And that’s the problem there has been little or no export of US LNG for decades and as a result zero investment in infrastructure for export purposes over that time. So we now have the US as potentailly a really significant net exporter of LNG for years to come but no way of putting the physical product on the wider world market. Yet.

So I disagree – the driver here will not be a crowding out effect at a higher price level it will in fact (in time) be a lower commodity price full stop.

@Sarah

I’m open to correction but I had thought that LNG was not subject to excise duties and therefore comparisons with taxes in NI are really a VAT issue where I think we’re pretty close. So taxes are no doubt an issue but definately not the main one. Corrib gas will no doubt be priced off European gas prices which as noted above continues to track crude oil prices – so bully for Shell and the Govt but consumers likely to take it up the ass – Russian style.

@Sarah
I’ve not seen the commercial plans of Corrib, but I would guess that they will supply at or close to the market price. Shell will be a price follower in the spot market because the pressure in the field is too high to play quantity games.

Apologies – clarification 🙂 : When you say “pressure in the field” is that actual gas pressure in the gas field (I’ve heard a lot about pressure in the pipeline???) , or are you talking about the market?

There seems to be some confusion between LPG (Liquid Petroleum Gas) which is extracted from raw oil or gas production or produced in the oil refining process and LNG (Liquified Natural Gas) which is natural gas cooled to around -165 C when it becomes liquid, is transported on specially deisgned refrigerated ships, stored at the import point temporarily and then re-gassified and injected into transmission system for delivery the same as all other natural gas inputs to consumers.

Shannon LNG is what it says on the tin – and import, storage and re-gas facility on the Shannon estuary with a pipeline line to BGE’s transmission system.

@Sarah,

Richard is correct. Both the Shell Consortium and Shannon LNG ( if or when it come on stream) will be price-takers since the bulk price in Ireland is determined by the price at the virtual UK National Balancing Point (NBP) which is the most liquid trading hub in North West Europe.

The key issue is that the unit cost of the interconnectors is added to the bulk price ex-UK to give the irish bulk price and the Shell Consortium and Shannon LNG will set their prices up to this level. If the thoughput on the interconnectors falls (as it will when Corrib and, possibly, Shannon LNG come onstream) then the unit cost of the interconnectors must increase to generate the €50m a year that BGE is determined to get. If the throughput on the interconnectors falls significantly the Irish bulk price could go through the roof and the Shell Consortium and Shannon LNG would make massive unearned profits.

This is the hole into which our brilliant politicians, policy-makers, regulator and energy semi-states have dug themselves. Their first reaction was to seek to impose some of the €50m BGE wants on Shell and Shannon. That didn’t get very far. They’re working very hard now to come with some way they can lump this on to consumers but conceal the fact that will be paying for some unused and useless pipes.

And, Sarah, I’m not having a go. I’m just disappointed that sharp and intelligent commentators and opinion formers such as yourself find it so difficult to get your heads around the simply con that is being perpetrated. This interconnector racket is just the latest manifestation.

@Paul
No. The price of gas imported from the UK is the UK wholesale price plus the cost of transmission. The cost of transmission equals the annual cost of the interconnector (opex + capex) over the annual flow. As there is more Corrib gas or LNG in the market, the price of UK imports will inevitably rise, allowing Corrib and LNG to raise their prices too and gain more market share at the same time, further reducing UK imports etc.

We’re fine 🙂 But I won’t back down from my argument that the ESB ‘s status as neither a public utility exploited for the benefit of the state, nor a private company under normal shareholder or competitive pressure, means that they serve no master and operate within a comfort zone, And I won’t apologise for being deeply pissed off that profits that could go to the state and alleviate cutbacks are instead going to a shockingly generous pension scheme. I preach acceptance of the “adjustment” with an air of resignation/told you it would come to this/no point complaining etc but you can’t expect people to accept cutbacks while those pensions are being paid and it’s OUR MONEY.

Anyway, back to gas, which is the purpose of the thread..

So just to clarify with Richard –

when you say

“As there is more Corrib gas or LNG in the market, the price of UK imports will inevitably rise…..”

The price rises because there will be less flowing from east to west and the annual cost of the interconnector has to be spread over a lesser flow?

and then……
“allowing Corrib and LNG to raise their prices too and gain more market share at the same time, further reducing UK imports etc.”

Corrib/LNG will be able to raise their prices because the base price is the UK price?

Butbutbut

Where on earth then does the CER come in? If the point of competition is to REDUCE prices, but the system is set so that everyone bases their prices off the UK price, how can there ever be true competition?

Ah Sarah, surely you’ve finally seen through the Bertie-era mantra of ‘more competition and better regulation’ – or have you not 🙂

It was, and is, all an optical illusion. Do you really believe that policy and regulatory dysfunction and failure were confined exclusively to the banking and financial sector? And that everything everywhere else is hunk-dory?

Just in the energy area alone, most people have no concept of the elaborate edifice that has been constructed to sustain this optical illusion. The CER publishes hundreds of documents a year. It would be a full time job to even begin to stay on top of it. Most people’s eyes just glaze over and they’re forced to take it on trust. Which is precisely the intention. Swamp them with (partial and self-serving) information, hide things in broad daylight and they’ll lose interest. And if something in particular does annoy them, they’ll inevitably get the wrong end of the stick and we’ll be able to deflect any criticism effortlessly.

And there’s a whole industry of researchers, analysts, PR operatives, some academics and tame consultants attached to the government machine, in the quangocracy or retained by the main market participants working feverishly to sustain this optical illusion. It’s a huge gravy-train and who, lapping it up, would contemplate de-railing it by calling it as it is. Even the ESRI, by virtue of the nature of the funding of its energy research, can’t call it.

I know you’re getting het up about the pay and pensions, but don’t attack the symptoms – go for the cause of the malaise. Then the symptoms will disappear.

This ‘gas problem’ fits within this bigger problem. Let’s start with the notion of an ‘interconnector’. It is a pipeline connecting two markets where gas is traded. It doesn’t need reverse flows (even though DG ENER of the Commission is hung up on these because of its ‘virtual’ fetish and the failure to allow for these is part of the infringement proceedings it is initiating before the ECJ – which is where we came in). All the gas could flow in one direction – say, east to west – but flows would vary in response to the difference in prices in the two markets.

Ideally, traders and suppliers in both markets would book capacity on the pipeline on a long-term basis and would pay for it irrespective of the volume of gas they flowed up to their booked capacity limit. In addition, this booked capacity would be tradable so that their would be no barriers to the entry of new players or to the exit of existing players. The bookings and payments would be designed to cover the fixed costs of the pipeline and only the short run costs of moving gas would impact on suppliers and traders’ decisions as they assessed the existing or expected price differential between the markets. And, on average, the difference between the prices in both markets would be equal to the short-run (marginal) cost of moving gas between them. This is how the gas market functions in the US, so it is perfectly possible to achieve this, but it took them the best part of 100 years to get there.

The wholesale price at the notional (or virtual) Irish Balancing Point (IBP) is equal to the UK NBP price plus the full costs of transportation between the two. It is unlikely there will ever be enough liquidity at the IBP to entice traders at the UK NBP to book interconnector capacity to arbitrage the two markets and to squeeze the price differential down to the short-run costs, but every effort should be made to close the differential.

This ‘gas problem’ provides an excellent opportunity.

The first step involves reducing this €50m annual revenue requirement to, say, €45 million because the CER has overvalued the assets. (This, of course, should be done for all network assets and prices to final consumers would fall.)

For the second step, the EU has a Gas Security of Supply Directive which requires owners/operators of gas supply infrastructure to ensure that they can replace the supply of their kit falls over. The interconnectors don’t provide real security of supply becasue there is a single line to the connection on the British and they are useless if the British system falls over or there are serious upstream/off-shore supply disruptions. But it would be reasonable for Corrib and Shannon LNG to, effectively, buy insurance by booking the option on some capacity on the interconnectors. Ballpark figure might be, say, €3m a year. That means we’re down to €42m.

The next step requires some effort and calculation, but it would be necessary to form a reasonable long-term view on how much capacity would be needed on the interconnectors once Corrib and Shannon LNG came on line and pro-rating the annual revenue requirement in line with this. Just for illustration purposes let’s say this amounts to €5 million. This would also provide an estimate of the unit cost for IBP pricing purposes – and it should be lower than the current unit cost This gets us down to €37 million.

This final step leaves us with BGE looking for €37 m for unused and useless capacity. BGE, the CER and the Government would love to load this onto consumers, but the best approach would be to write the asscoiated assets off over, say, a 10 year period. Consumers would benefit eventually and BGE would have time to re-organise its finances.

@Sarah
I get worried when we both agree – but I guess there is a small possibility we both could be right on this issue.

@Yields
All these lower capital intensive adventures that deplete resourses / capital over time are a favourite of the banks with huge credit exposures i.e. all of them.
A Nuclear economy would obliterate the price of consumer credit dependent items such as houses because so much real money must be spent.
Think of how the housing market would have reacted here if they built 2 / 3 Sizewell B PWRs ?
First of all the private or public utility would make huge losses because of the immediate electricity glut and subsequent price implosion.
Its not a problem if you have a CB that can produce more money via defecit spending to bail out the investments that can then be taxed in a envoirment of higher energy densities but if you have a CB that is a prisoner of commercial banks they would seek to create a shortage so as to pay off their depleting “investments”.
This is the fundamental reason why market states are deindustrializing – they need shortages so as to express a false extractive profit.

PS
You could see this on a smaller scale when looking at the VRT quandary in this country.
I find it quite funny really.
The Department of Finance is freeting because consumers became more effiecent , displacing oil consumption & therefore its tax take.
The CB could not defecit spend to fill this hole created by efficiency !!

My FG councilor father and the local SF councillor have more than once exchanged concerns as they find themselves on the same side 🙂

@Paul

Thanks for that. I’ve absorbed about half of the detail but will continue studies 🙂
I’m relating it back to telecoms, about which I know something. Competition began there by booking capacity on leased lines. It seems like your solution starts with something similar?

Just one further clarification:

“he wholesale price at the notional (or virtual) Irish Balancing Point (IBP) is equal to the UK NBP price plus the full costs of transportation between the two. ”

and that wholesale price is set by CER and they are following some EU directive?

The UK NBP price is unregulated. It is transparently discovered via the interaction of supply and demand. The CER regulates the level and structure of the tariff for use of the interconnectors. So the IBP price is the unregulated UK NBP price plus whatever the CER decides to add on for the interconnectors.

When I see the difficulty a person like you seems to have getting your head around this stuff I wonder what the vast majority of consumers make of it when, if ever, they give it any consideration.

It’s not rocket science, but it has been made excessively complicated to confuse people and to compel them to take it all on trust. This is the situation when it is most dangerous for citizens, because nothing good ever comes from a situation when people are forced to take things totally on trust.

Remember the ‘world class’ bank supervision and financial regulation we enjoyed up to end-Sep 2008. We still have this ‘world class’ regulation in all other sectors. Citizens beware.

As I said earlier, I’m finding myself linking it back to telecoms, which I do understand.

People get obsessed in telecoms by “the last mile” or even the “middle mile” -because that’s what the consumer sees, whereas the “first mile” is the key issue.

What I have discovered (through your patient explanations here) is that I was getting caught up in the power equivalent of the last mile – the price charged to the consumer, whereas the real action appears to be at the first mile – the price of the raw material to generate the power.

I think consumers probably never consider it – they blame the ESB or Airtricity (as I have done – and am not letting entirely off the hook). It’s a factor of
a) the complexity of the situation – and to be fair – it IS complex
and
b) politicians wouldn’t have a hope of trying to explain it in the combative polarised current affairs shows and
c) journalists don’t bother.

I have done a few columns on telecoms and energy in the past and think I got them fairly accurate but it took huge work. It is always worth it in the end, but of course, changes nothing 🙂

You’re right about the price of the raw material used in (conventional) generation, but that is largely out of Ireland’s control. The capacity payments to generators (to recover their fixed, unavoidable, costs) and the costs of the network (which make up much of the rest of the final price to consumers) are determined by the CER. That’s where the really big rip-off is occuring.

This would be forced out in to the open if the relevant Oireachtas Cttee was able to give the Minister and his officals, special advisers and tame consultants a good ragging and if consumers had effective statutory representation in the CER’s decision-making processes. The media shouldn’t be trying to provide a forum for these conflicts; it should be reporting on them. Just think of the entertainment value. A spluttering minister or a regulator confronted with irrefutable evidence that the former was indirectly and the latter directly authorising the hosing of consumers to keep the ESB and BGE in the style to which they have become accustomed.

So should we be surprised that an Oireachtas Cttee confronting a minister resembles the ‘savaging by a dead sheep’ that Dennis Healey used to describe an attack from Goeffrey Howe or that the ‘public consultations’ on a proposed decision by the CER (or indeed any economic regulator) are so farcical as to be beyond parody.

But don’t despair. Optical illusions can never be sustained indefinitely.

Shannon LNG told the CER on June 15, 2011 (http://www.cer.ie/GetAttachment.aspx?id=9cea03b0-6b9c-4730-9bca-0011f5cc81f6) that “If Shannon LNG charges the same price as UK imports of gas to Ireland, then Shannon LNG cannot gain market share”. It seems that the only way to have downward pressure on the wholesale price of gas in Ireland is if the price effect of the interconnector is neutralised for all market players as the real competitors of Shannon LNG and Corrib are the other exporters into Ireland from the UK. Maintaining the diversity premium in favour of Corrib and Shannon LNG will bring new entrants into the market but in a uncompetitive manner (which is also contrary to EU Directives). So, it seems that some EU Directives are more important than others, doesn’t it?

What I mean is that Shannon LNG know they will not get market share if they have to compete directly on price with UK exporters into Ireland.

They will only come into Ireland if they can be guaranteed market share via a price that is higher than the UK price (which is the UK NBP + the interconnector cost applied to remaining market participants importing from the UK). This guaranteed market share will only come about if they do not have to contribute to the fixed part of the interconnector cost as they would then always be able to undercut the price Bord Gais pay for gas imported via the interconnector. This is of no benefit to consumers as everyone agrees it leads to a price rise for the consumer (up to €50 million/year). It does, I agree, lead to a certain extra security of supply benefit in theory, but as Ireland and the UK is effectively the one gas market, Ireland already has access to other gas sources which are already based in the UK (such as the LNG terminals at Milford Haven in Wales).

Security of Supply on the island can be enhanced in other ways such as by flattening the production profile of Corrib so that it could immediately respond to an upsurge in demand if there was an incident at the interconnector. Another method is through the expansion of the storage facilities at the PSE Kinsale Energy field which is already on the cards and which would be able to store 18% of national average gas demand.

So, it seems that the only way Shannon LNG will come in is if they can get a guaranteed market share. This will not happen if there is free competition for all market exporters into Ireland. A guaranteed market share for Shannon LNG means that the consumers would pay more. Add to this the vertical integration by Hess LNG (the owners of Shannon LNG) and possible use of transfer pricing mechanisms, Hess LNG, based in the offshore tax haven of the Cayman Islands might not pay any tax at all in Ireland on the guaranteed market share they want offered to them on a plate. This is what led Minister Pat Rabbitte to state in the Dail on November 29th last: “the prices for the consumer would go up and there would be a windfall gain for the multinationals” and “We have no wish for prices to be pushed up as a result of a stranded asset, that is, the interconnector, and a windfall profit to the multinationals, much as we welcome them here, whether they are associated with Corrib or LNG.”

Even if the €50 million cost is reduced on closer examination, the most that it can be reduced to is a price that allows free competition between all exporters into Ireland otherwise it is handing over a monopoly to Shannon LNG. This is similar to the catch-22 you referred to in your submission to the CER in March 2011.

As is so often the case on this blog I’m fully exposed, but I have no idea with whom I’m engaging, but such is life in this miserably closed and self-censoring society…

You seem to be au fait with a number of the issues, but you also seem to be operating under a couple of delusions.

I’m not sure who developed the notion of a ‘diversity premium’ but it is very helpful for what I call the Quadrumvirate (the Department, the CER, BGE and the ESB (which will also benefit if the other three get their way)).

This so-called ‘diversity premium’ is, in actual fact, a ‘lack of an Irish liquid market penalty’. If such a liquid market existed at the IBP then the difference in prices between the UK NBP and the IBP would, on average, be equal to the short-run (marginal) cost (SRMC) of increasing or decreasing gas flows on the interconnectors. But it doesn’t – and is unlikely ever to emerge – so the import price will be NBP price plus some interconnector unit cost that is higher than the SRMC.

The policy objective should be to push the interconnector unit cost as close to the SRMC as possible so that Irish consumers experience the benefits of the market arrangements being as close as possible to a single market on these islands.

Relating this unit cost (and capping it) to the actual future usage of the interconnector is probably the best sub-optimal outcome available. But this leaves BGE with a fairly big chunk of unrecovered revenue on the interconnectors. This might be reduced a little, but only a little, if the prospective new suppliers were to pay annually for an option to use intereconnector capacity if their kit were to fall over (in line with the EU gas security of supply directive).

I understand that the ESRI has previously suggested that BGE’s directly unrecoverable interconnector revenue should be loaded on the postalised exit charges. I’m not sure if they are still advocating this, though I gather they are continuing to advise the CER. I understand that Colm McCarthy, in a report for Shannon LNG, is recommending something similar, but that it should be written down progressively from 2015.

This is probably the key element of this best sub-optimal solution, because consumers are already being taxed implicitly to finance BGE network investment, they have contributed more than enough to finance and then fully recover these investments and they more than deserve the prospect of fully benefitting eventually from the supply diversity that is being offered.

BGE will simply have to have re-organise the financing of its activities as this stream of revenue declines. It might be useful for BGE to recognise that it exists to serve network users and the consumers it supplies directly. If it is pursuing, or desires to pursue, activities beyond these they should be financed independently and not rely on cross-subsidies from its network business.

You also seem to think that there is potential for supplies into Ireland from Britain that would not be priced off the UK NBP price (or on some future or foward arrangements related to the NBP price). This is extremely unlikely and for planning and policy purposes the price of supplies from Britain will be the NBP price plus whatever interconnector unit cost is decided – and this will be the IBP price.

The best way to minimise any windfall gain that Shannon LNG or the Shell Consortium might secure is to minimise the interconnector unit cost. To secure whatever market share it desires, Shannon LNG (and the Shell Consortium) will have to beat the IBP price. I just can’t see how either (or Shannon LNG in particular) would have a monopoly. They should be able to sell as much as they want but they would have to price it below the IBP price. It’s impossible to say by how much, but consumers should benefit.

However, I never suggested that there was a potential for gas supplies into Ireland from Britain to be priced off the UK NBP – the opposite in fact. What I said was that Shannon LNG gas (which is not coming from Britain) will be priced above the UK NBP if the diversity premium of the interconnector issue is not addressed and that is the only monopoly scenario in which Hess will invest in Ireland. Do they really think that we can still be so foolish as to allow them have a monopoly position in the irish market with nothing in return except higher prices for consumers? The Emperor has no clothes and the optical illusion has been exposed.

I do not agree that the windfall gain for Shannon LNG or Corrib should be minimised; rather it should not exist at all. Why should LNG or Corrib get a guaranteed windfall gain every year forever from the Irish consumer at a time of increasing fuel poverty? This would be anti-competitive. The correct terminology to use in this scenario is “abuse of dominant position”. In an openly competitive market, Shannon LNG would not be able to state that it will take 50% of the market – the downward pressure on prices from UK exporters to Ireland via the interconnector would ensure that they would not have guaranteed market share every year. This will surely have an impact on the business decision by Hess to invest nearly half a billion euros in the Shannon LNG project as it increases the risk on their investment and they risk having a white elephant on their hands there on the Shannon Estuary (unless they can build their own power stations on the site and jump the queue with 900 MW of grid access while they are at it – oh maybe that has already been decided). However, it is not Ireland’s job to worry about the return to shareholders of a company registered in the Cayman Islands.

Likewise, neither should Bord Gais have any windfall gains from the interconnector and I never suggested otherwise.

The main question to be answered is why would anyone oppose a level playing field for all market participants in the irish gas market?

Thank you. I think we have both been able to clarify our respective position and we may not be that far apart. However, I still have some issues with your notions of a ‘diversity premium’, ‘windfall gains’, ‘monopoly’ and a ‘level playing field’.

I think we are agreed that, for the foreseeable future, the price of imports from Britain (delivered at the virtual IBP) will be the UK NBP price plus some measure of the unit cost of transmission on the interconnectors. It doesn’t matter who’s doing the importing from Ireland or the exporting from Britain, that’s the reference price they’ll be working with. And I think we are also agreed that this unit cost of interconnector transmission should be as low as possible consistent with providing BGE appropriate and adequate compensation for the transmission services provided.

The problem that arises is that this compensation is likely to fall far short of the €50m a year to which BGE believes it is entitled. All the other issues you raise fall away at this point. I have no knoweldge whatesover of the detailed economics of the Shannon LNG project, nor of the commercial assumptions or parameters they are using. But I would be very surprised if they were not doing their economics on the basis that the IBP reference price would be UK NBP plus a ‘little’ (to cover the interconnectors). I doubt very much if they did their calculations on the basis that the government and the CER would be so determined to ensure that BGE got its €50m a year on the interconnectors that they would allow the interconnector unit cost to shoot through the roof and drive the IBP reference price up.

It is this possibility that has finally energised the Department and the CER. They want BGE to be able to recover the €50m a year, but they don’t want to drive the IBP reference price up with both the Shell Consortium and Shannon LNG capturing an unearned margin. They can’t have both. And it is highlighting the folly of building the second interconnector in the first place.

So the solution has to be comprised of relating BGE’s interconnector revenues to the services actually provided, putting a cap on the unit cost (so that the IBP reference price is more or less a small fixed margin over the UK NBP price), moving the interconnector revenues not recovered from entry charges to the exit charge and writing down over time the value of the assets not providing used or useful capacity.

Let the Shell Consortium and Shannon LNG sell whatever amount of gas they can as they price in relation to, but always below, the IBP reference price.

Good point. The hedging and forward purchasing certainly come in to it, but these, and the futures contracts, comprise the layer of commercial positioning that all market participants engage in and this layer sits on top of the NBP ‘spot’ or ‘prompt’ (day-ahead) reference price. All these contracts are related to, marked to or settled at the NBP price. I certainly have doubts about the liquidity and depth of the NBP market and about how genuinely transparent the price discovery is – and I know these doubts are shared by others, but it is a key reference price for the North West European regional gas market that comprises, in addition to the NBP, the PEG Nord in France, the Zeebruge physical hub, the Dutch Title Transfer Facility (TTF) and two virtual German hubs.

The reality is that, at the margin, if a supplier/trader in Ireland wishes to buy some gas promptly in addition to what it might have already contracted, gas is readily accessible at the NBP at the prompt price.

So we have to take that as the reference price and not worry about the commercial machinations that take place around it – as I sometimes doubt that those who claim to know what they are doing actually do and it would be futile to second guess them.

And then we get back to the key questions: how much ‘unit cost’ should be added to this to generate the IBP reference price? And how should any ‘costs’ not recovered by the application of this ‘unit cost’ be recovered, if at all?

A final decision on the go ahead for the Shannon LNG project will be made in 6 weeks’ time. That’s according to the Commission for Energy Regulation which is making a decision on the use and payment for gas interconnectors. Although planning permission has been granted for the long delayed project, work has not begun because the Commission for Energy Regulation had yet to make its decision on whether or not the company would have to pay for gas interconnectors it will not use. The 600 million euro liquefied natural gas terminal on the Tarbert Ballylongford land bank will create 450 jobs if it gets the go ahead. Denis Cagney the director of the gas division at the commission told Radio Kerry a proposed decision will be made by mid February followed by a final public meeting a few weeks later. The commission will make its final decision in mid March. The news comes two weeks after the EU Commission announced it was taking Ireland and the United Kingdom before the EU court of Justice for failure to introduce sufficient competition in the gas market.

A draft proposal is recommending Shannon LNG pays a tariff for gas interconnectors. The proposal is contained in a draft document from the Commission for Energy Regulation. The Commission is recommending a fixed charge for all energy companies regardless of whether they use the gas interconnectors or not and will depend on their size. The interconnectors are part of Ireland’s gas transmission network. Shannon LNG which is planning to build a 600 million euro liquefied natural gas terminal on the Tarbert Ballylongford landbank says it will not be using these interconnectors and therefore shouldn’t have to pay. However the Commission for Energy Regulation says companies not using the interconnectors will still benefit in terms of security of supply. It adds if the tariffs are not applied and new sources of gas come on stream, gas prices for consumers will rise. Shannon LNG has rejected this claim and says the proposal is contrary to EU and Irish legislation. There are fears if the tariff is applied to the company, then the north Kerry project could be in doubt. A public forum will be held by the Commission for Energy Regulation in Dublin around March 1st. The commission is also accepting submissions from the public on the draft from now until March 16th, details can be found at http://www.cer.ie

Breaking news from Radio Kerry today where managing director of Shannon LNG, Paddy Power, said the tariff could cost the company up to 75 million annually – am I reading that correctly, 75 million euros:

Ireland is closed for business to the energy sector at present.
That’s according to the managing director of Shannon LNG, Paddy Power, who gave a presentation on the status of the project to the monthly meeting of Kerry County Council.
The 600 million euro liquefied natural gas plant on the Tarbert Ballylongford landbank has been beset by delays.
The project would bring 650 construction jobs and 100 permanent posts when complete.
Last Friday, the Commission for Energy Regulation published a draft recommending tariffs for gas interconnectors are applied to companies such as Shannon LNG which won’t use them.
A public consultation process is ongoing.
Today, Paddy Power from Shannon LNG told Kerry County Council the move is a fundamental change in Government policy saying it was like turning up for a football game only to be told you were playing hurling.
He said the tariff could cost the company up to 75 million annually.
Mr Power told Radio Kerry News they would not be making a statement on the how the proposed tariffs would impact on the future of the project until they have studied the draft in detail.
MEP Sean Kelly said in other countries the project would be up and running within six months and he will be checking if the tariffs break EU competition law.
Deputy Brendan Griffin said he is hoping to raise the issue in the Dail this week and Deputy Arthur Spring said the Energy Commissioner must account for himself.
A deputation is due to meet the Taoiseach soon to discuss the matter.